GMAC Securities Plan to Reward Institutions

GMAC LLC, the financing unit 49%-owned by General Motors Corp., is giving individual investors who loaned the company $14.6 billion lower priority than institutions should the company file for bankruptcy.

Holders of so-called SmartNotes, which GMAC has sold to individuals since 1996, are not included in the company's $38 billion plan to exchange securities for new, discounted debt and preferred shares or cash, said Gina Proia, a spokeswoman for the Detroit company.

SmartNotes investors "would be subordinated to the new notes, but they're not being asked to take a principal discount," she said in an interview.

Retail holders of the debt "could get virtually nothing if the company files for bankruptcy," said Kathleen Shanley, an analyst at the Chicago research firm Gimme Credit LLC, who recommends that investors sell GMAC debt. "If the exchange goes through, they would be subordinate. That would not be a good position to be in."

GMAC issued $25 billion of SmartNotes in $1,000 denominations during the past decade, using the proceeds to help pay for day-to-day operations.

The offer to swap unsecured notes held by institutions is part of GMAC's plan to convert into a bank holding company to gain access to the Treasury's $700 billion rescue fund. The exchange would be the second in five months for the company and its Residential Capital LLC mortgage unit, which have reported losses since mid-2007.

If the debt swap is not completed by yearend, there is a "significant risk" GMAC will default, the company said in a Nov. 20 regulatory filing. The private-equity firm Cerberus Capital Management LP in New York bought 51% of GMAC in November 2006.

The exchange is "limited to institutional notes and does not include retail debt instruments," Ms. Proia said in the interview last month. She declined to say why SmartNotes would rank behind other debt.

The bonds already reflect investors' concerns about being repaid. GMAC's 7.5% SmartNotes due in 2017 fell about 6.7 cents, to 15.9 cents on the dollar, on Nov. 20 after the exchange offer was announced, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The notes continued to decline last week, falling to 11 cents on the dollar by Nov. 25.

"If they're going to offer one group the exchange, shouldn't they offer it to all groups?" asked John Aronian, a private investor in North Salem, N.Y., who owns SmartNotes. "Or are they just going to throw one group out the window? The people that really need the most attention here are the retail buyers."